Ratios are an expression of one number in terms of another. This form of analysis facilitates comparison between the financial performances of different businesses or industries. Ratio, vertical and horizontal analysis are commonly used by financial analysts because they are useful tools for planning, controlling and monitoring an organisational performance. A range of financial ratios are there, including: liquidity, solvency, profitability, efficiency and investor ratios. Advantages of ratio analysis include: Ratio analysis enables the users of the financial statement to make comparisons between the financial performances of two or more businesses, even if they are of different sizes or from different industries, by converting financial numbers into standardized form using pre-defined formulas. Ratios are easy to calculate and do not consume significant amount of time. Ratio analysis is a useful tool to monitor and control a business organisation’s performance. The users of the financial statements are often interested in assessing Continue reading
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Real Options Method in Capital Budgeting
Real options method is one of the investment appraisal techniques for capital budgeting which can deal with the limitations of the Net Present Value (NPV) method. Real options method is a method of evaluating and managing strategic investments decisions in an uncertain business environment. Using real option methods has been recognized that the application of standard NPV techniques can lead to wrong conclusions in the presence of unrecognized embedded options. The central role of NPV techniques in financial decision making therefore makes it imperative that real option structures in investing opportunities are identified and accounted for. It turns out that real options can be found in most live environments where uncertainty or risk, waiting, investment irreversibility, growth opportunity, asymmetric information, staged investments, competitor response, economies of scale, project switching, suspension, abandonment and start-up are important. In fact, these include the full spectrum of investment decision making, including those concerning capital Continue reading
Indian banking system: Development banks: Export-import bank of India (EXIM Bank)
The Export-import bank of India (EXIM Bank) was set up in January 1982 as a statutory corporation wholly owned by central government. Its paid up capital in 1988-89 was Rs 220.50 crores. Activities performed by EXIM Bank: It grants direct loans in India and outside for the purpose of imports and exports; Refinances loans to banks and other notified financial institutions for the purpose of international trade ; Rediscounts usance export bills for banks; Provide overseas investment finance for Indian companies toward their equity participation in joint venture abroad and guarantees, along with banks, obligations on behalf of project exporters; It is also a co-coordinating agency in the field of international finance and it undertakes development of merchant banking activities in relation to export oriented industries; Thus it provides fund based as well as non fund based assistance in the foreign trade sector. The main objective of Export-Import Bank (EXIM Continue reading
Capital Sources for Business: Debentures
A debenture is a document issued by a company as an evidence of a debt due from the company with or without a charge on the assets of the company. It is an acknowledgement of the company’s indebtedness to its debenture-holders. Debentures are financial instruments for raising long term debt capital. Debenture holders are the creditors of the company. In India, according to the Companies Act, 1956, the term debenture includes “debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.” Debenture-holders are entitled to periodical payment of interest at an agreed rate. They are also entitled to redemption of their capital as per the agreed terms. No voting rights are given to debenture-holders. Under section 117 of the Companies Act, 1956, debentures with voting rights cannot be issued. Usually debentures are secured by charge on or mortgage Continue reading
What is Financial Restructuring?
Financial restructuring is the process of reshuffling or reorganizing the financial structure, which primarily comprises of equity capital and debt capital. Financial restructuring can be done because of either compulsion or as part of the financial strategy of the company. This financial restructuring can be either from the assets side or the liabilities side of the balance sheet. If one is changed, accordingly the other will be adjusted. The two components of financial restructuring are; Debt Restructuring Equity Restructuring 1. Debt Restructuring Debt restructuring is the process of reorganizing the whole debt capital of the company. It involves reshuffling of the balance sheet items as it contains the debt obligations of the company. Debt restructuring is more commonly used as a financial tool than compared to equity restructuring. This is because a company’s financial manager needs to always look at the options to minimize the cost of capital and improving Continue reading
Prospect Theory in Behavioral Finance
The Prospect Theory was originally conceived by Kahneman and Tversky (1979) and later resulted in Daniel Kahneman being awarded the Nobel Prize for Economics. The work by the authors is considered as path breaking in behavioral finance. They introduced the concept of prospect theory for the analysis of decision making under risk. This theory is considered to be seminal in the literature of behavioral finance. It was developed as an alternative model for expected utility theory. It throws light on how individual evaluate gain or losses. The prospect theory has three key aspects. People sometimes exhibit risk aversion and sometimes risk loving behaviors depending on the nature of the prospect. This is due to the fact that people give lower weight age to the outcomes which are probable as compared to those that are certain. This makes them risk averse for choices with sure gains while risk seekers for choices Continue reading